LCH set to take CGBs as collateral

Asia Risk Congress: US dollar and euro CGBs confirmed for next year while CNY versions remain a goal

LCH is planning to add offshore China government bonds (CGBs) to its pool of acceptable collateral early next year, in an effort to reduce members’ reliance on cash collateral in the Asia region and help them to optimise margin costs.

“We are looking to support CGBs soon – euro and USD-denominated first – and that will be closely followed by CNH [offshore renminbi],” said Weilong Tan, senior sales and relationship manager at LCH, during a panel discussion at the Asia Risk Congress in Singapore on September 25.

Tan said euro and US dollar-denominated CGBs are likely to be added in the first quarter of 2025, while CNH-denominated CGBs could follow towards the end of that year.

LCH has been working to expand its collateral eligibility, especially in Asia. At last year’s event, Rohit Verma, head of LCH Asia, revealed the clearing house held roughly $300 billion of collateral globally, of which roughly 60% was non-cash. This percentage drops to 20% in Asia, however. 

In 2021, LCH began accepting Singapore dollar-denominated cash, government bonds and treasuries as eligible collateral.

“We are aware that in a high interest rate environment, funding with cash can be very expensive,” said Tan. “This is why we are also always on the lookout in terms of what we can do to support the market next.”

Offshore-denominated CGBs, issued by China’s Ministry of Finance in foreign financial centres such as Hong Kong, remain scarce compared with their onshore renminbi (CNY) equivalents, which have a market size of $14 trillion.

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Offshore holdings of CNY-denominated bonds have grown in recent years, a trend fuelled by the success of market access schemes such as Southbound Bond Connect and CIMB Direct. But uncertainties around the enforceability of collateral in insolvency proceedings, as well as onshore-offshore connectivity, have made it more of a challenge for onshore bonds be accepted as eligible collateral outside of China.

Tan says LCH hasn’t ruled out adding CNY-denominated CGBs to its list of eligible collateral at some point in the future, but conceded that such a step remains a long way off.

“CNY, for us it’s a dream and an ambition, but there’s some work to do. Again, we are interested in trying to at least support bits of it in the near future,” Tan said.

Clearing members at Hong Kong Exchange OTC Clear will soon be able to post the bonds as collateral at the CCP. With a targeted launch of the end of 2024, it aims to start accepting onshore-issued CGBs and policy financial bonds held by international investors through Bond Connect as collateral for Northbound Swap Connect, the market access scheme that allows offshore investors to tap the onshore CNY interest rate swap market through HKEX OTC Clear. 

Editing by Joe Parsons